The Impact of firms’ capital expenditure on working capital management : an empirical study across industries in Thailand

Abstract

[Abstract] The purpose of this research is to investigate the impact of firms' capital expenditure on their working capital management. The author used the data colleted from listed companies in the Thailand Stock Exchange. The study used Shulman and Cox's (1985) Net Liquidity Balance and Working Capital Requirement as a proxy for working capital measurement and developed multiple regression models. The empirical research found that firms' capital expenditure has a significant impact on working capital management. The study also found that the firms' operating cash flow, which was recognized as a control variable, has a significant relationship with working capital management, which is consistent with findings of previous similar researches. The findings enhance the knowledge base of working capital management and will help companies manage working capital efficiently in growing situations associated with capital expenditure. [Keywords] Capital expenditure; Thailand stock exchange; working capital; firm Introduction Background Corporate finance basically deals with three decisions: capital structure decisions, capital budgeting decisions, and working capital management decisions. Among these, working capital management is a very important component of corporate finance since it affects the profitability and liquidity of a company. It deals with current assets and current liabilities. Working capital management is recognized as an important concern of the financial manager due to many reasons. For one thing, atypical manufacturing firm's current assets account for over half of its total assets. For a distribution company, they account for even more. The maintenance of excessive levels of current assets can easily result in a substandard return on a firm's investment. However, firms with inadequate levels of current assets may incur shortages and have difficulties in smoothly maintaining day-to-day operations (Home and Wachowicz, 2000). Efficient working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on one hand and avoids excessive investment in these assets on the other hand (Eljelly, 2004). Many exiting research papers have found that managers spend a considerable time on day-today working of capital decisions since current assets are short-lived investments that are continually being converted into other asset types (Rao, 1989). In the case of current liabilities, the firm is responsible for paying obligations mentioned under current liabilities on a timely basis. Liquidity for the on-going firm is reliant, rather, on the operating cash flows generated by the firm's assets (Soenen, 1993). As a result, working capital management of a company is a very sensitive area in the field of financial management (Joshi, 1994). It involves the decisions about the amount and composition of current assets and the financing of these assets. The decision-making process on the level of different working capital components has become frequent, repetitive, and time-consuming. Corporations are looking for new ways to stimulate growth, improve financial performance, and reduce risk in today's challenging economic climate. Funds tied up in working capital can be seen as hidden reserves that can be used to fund growth strategies, such as capital expansion. Cash flows locked in stock and receivables can be freed up by understanding the determinants of working capital. Many organizations that have earned profits over the years have shown the efficient management of working capital (WCM). The successful management of working capital is essential for short-run corporate solvency or the survival of any organization. Especially, efficient WCM will lead a firm to react quickly and appropriately to unanticipated changes in market variables, such as interest rates and raw material prices, and gain competitive advantages over its rivals. …